Experts Begin Assessing New Compensation Disclosures

The Securities and Exchange Commission’s new compensation disclosure rules are meant to shed light on the details of executive pay, but there are questions regarding how much detail is too much.

New proxy statements include pages of explanations and calculations meant to clarify what goes into each component of executive pay. The table that reveals the amount of accumulated cash in a savings plan is accompanied by a seven-page breakdown of earnings measures, withdrawal terms and other details. In addition, there are extensive tables on stock-based compensation, including details on grants of restricted stock and options.

“Shareholders will run into problems—the language is still not in layman’s terms,” says Bob McCormick, vice president of proxy research and operations at Glass Lewis.

Calculating incentive pay is still difficult.

“Some of the tables—especially the outstanding equity awards tables—are enormous and can be overwhelming,” says Paul Hodgson, senior research associate at the Corporate Library.

In addition, it’s still hard to distinguish between short-term and long-term incentives. While restricted stock and options clearly fall into the latter category and salary and bonus into the first, it’s unclear what should be made of non-equity-based incentive comp.

It’s obviously cash, but in some cases it’s tied to stock performance, so it’s classified by Johnson & Johnson, for example, as long-term pay. To date, however, most new proxies classify this incentive pay as short-term but don’t explain how it’s different from cash bonuses tied to performance measures such as earnings, cash flow or some combination thereof.

The SEC definition is of little help, as it simply distinguishes this reward as pay based on future performance rather than payment for past work.

Still, the detail is revealing. It’s simpler to see the value of stock-based awards and how pay is linked to performance.

“The disclosure of factors for performance-related compensation used to be split within several areas of the proxy and the 10-K filing, and now it’s there in one section,” McCormick says.

And for the first time, proxies show how stock option exercise prices are set. That’s a change, McCormick says, that was driven by concerns about backdating.

On the other hand, finding the “true” total of an executive’s pay in a given year remains a problem. Do options that can’t be exercised for a number of years count as pay when granted? They have a value, according to the Black-Scholes valuation model, and it’s included in the proxy. And what about deferred compensation or additions to retirement plans?

Some observers say that methodology may seem to understate the amount an executive makes in a given year.

“There’s some confusion when it comes to which total we’re supposed to use,” Hodgson says.

So in the end, how much pay top executives earn in a given year may depend on who is doing the analysis.

“My approach is and always has been to focus on what went into an executive’s pocket during the year,” Hodgson says. “I’m interested in how much they made, not the estimated valuations of stock options.”

For that reason, he pays special attention to charts that include perks lumped together under “all other compensation” and describes these disclosures as “a potential flash point for critics who question the value of extras when executives are already collecting a large salary.”

So even if the new proxy disclosures don’t make for easy comparisons, consultants still are pleased to have them.